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Why a Legal Victory Over the Federal Reserve and Wall Street is a Big Win for Taxpayers

Score one for the freedom of information. The Supreme Court's move to force the Federal Reserve to disclose which banks took out emergency loans during the financial crisis is a victory not only for Bloomberg, the news organization that brought the case, but for anyone favoring government transparency.

For at least two years, the Fed refused journalists' requests to identify financial institutions that borrowed from its so-called discount window during the height of the financial crisis in 2008-09, when it disbursed $3.5 trillion as part of an unprecedented industry bailout. Banks also opposed releasing the information and appealed a lower-court ruling ordering the central bank to disclose the information. Bloomberg subsequently filed suit.

In some ways, the case had been overtaken by events. The Dodd-Frank financial reform law passed last year now requires the Fed to disclose discount-window lending data, although it may withhold the info for two years after a bank borrows the funds. I also question whether taxpayers will learn much more than we already know about the bailout. Certainly it's no secret that Wall street giants such as Bank of America (BAC) and Citigroup (C) would've crumbled under the weight of their massive mortgage-related losses if not for the Fed riding to the rescue.

Walking on sunshine
Still, the justices' decision to let the court ruling stand draws an important legal line in the sand. As Bloomberg News editor-in-chief Matthew Winkler said in applauding the high court's move:

The Federal Reserve forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny. The Fed must be accountable to Congress, especially in disclosing what it does with the people's money.
The decision also blows away the banks' feeble argument for keeping the emergency lending info under wraps -- that it could undermine public confidence in the companies. Excuse me? People lost confidence in the banks because they went broke, not because the Fed tattled on them. Besides, if Wall Street firms were really worried about shoring up public faith in their solvency, they wouldn't currently be draining their capital by rushing to pay dividends to shareholders.

As Winkler notes, it's equally critical to shed light on the Fed's internal decision-making. There is good reason to resist efforts to shackle the agency to Congress, as some critics favor. Yet the central bank for too long has cloaked its actions behind the Fed's historical mandate to operate as an "independent" steward of U.S. monetary policy. As history shows, it is anything but.

All the more reason to insist that the Fed open its books to the public. Nothing restores faith like the clear light of day.

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